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Marriott's New View Of Downtown

July 25, 1999

The Corporation: Strategies

Marriott's New View of Downtown

It's putting rooms for road warriors in inner cities

Recently, J.W. "Bill" Marriott Jr. paid an inaugural visit to one of his newest properties, a Courtyard Hotel in downtown Washington. As he stepped from his limo, the imperturbable chairman and CEO of Marriott International Inc. eyed a group of men loitering around his grand property, still fresh from a $25 million renovation. What he didn't take in was the rest of the block--a ramshackle row of shops and a nightclub with bulletproof glass. How much does he know about the neighborhood? "As much as I want to," Marriott says without a smile.

In fact, Marriott no doubt knows this downbeat stretch of F Street better than he's letting on. So why did the nation's leading hotel chain place one of its most highly regarded brands--Courtyard, a 394-hotel chain of no-frills rooms for road warriors--into a 108-year-old former bank building on this seedy urban strip last month? It's part of a strategy that, since February, 1998, has seen Marriott develop up-and-coming locations in about a dozen downtowns. Among the new locales: an abandoned molasses factory in New Orleans, a former plumbing-company headquarters in Omaha, and a converted City Hall annex in Philadelphia. The idea is to leverage Marriott's popular Courtyard name and take advantage of Corporate America's return to inner cities. And having saturated the suburban market, Marriott needs new territory for expansion.

Adapting Marriott's suburban hotel concept has enabled it to expand quickly in a glutted market. But the plan carries some risk. Renovating old buildings is more costly than building suburban hotels from scratch. There's also a chance that some downtown revivals will fizzle, dumping multimillion-dollar investments and bruising Marriott's reputation for consistency. "You run the risk of seriously affecting the brand by putting it in less-than-sterling neighborhoods," says one hotel-industry exec.WIDE NET. Courtyard is just one piece of a rich portfolio of Marriott brands, from luxurious Ritz-Carltons to low-end Fairfield Inns. Unlike such competitors as Starwood Hotels & Resorts Worldwide and Hilton Hotels, Marriott sought early on to dominate not just one tier of the $86 billion U.S. lodging market but all of it. And it did just that by tailoring its offerings to niche sectors while maintaining the Marriott halo.

That strategy is paying off. A rash of overbuilding has pushed down U.S. hotel-occupancy rates in recent years, to around 64% in 1998. Although Marriott felt the squeeze, it lost only half a point, posting 78% average occupancy for all of its hotels. Marriott's overall operating income soared 20% in 1998, to $626 million, while revenues rose 10%, to $8 billion. "Developers are flocking to the Marriott brand because they know it's the best brand out there," says Henry Kaczmarek, an analyst for American Express Financial Advisors, which holds 9.8 million Marriott shares.

Some investors see Marriott as a relative haven in a stormy sector. As profit growth slows, hotel stocks have dropped from their highs of a couple of years ago. Marriott International shares are trading around $37, up 3% from where they started in March, 1998, when the original Marriott spun off its lodging business as Marriott International and merged its food-service and facilities-management businesses into Sodexho Marriott Services Inc. That performance pales next to the 27% rise for the Standard & Poor's 500-stock index during that time, but it handily beats a 22% drop for the S&P hotel-motel index.SIMPLE PLAN. Marriott scored one of its biggest hits in 1983 when it launched Courtyard. The concept was exceedingly simple: follow the flight of business to the 'burbs and target road-weary execs. Courtyard's boxy buildings are unremarkable, cookie-cutter designs surrounding a central pool. But there's plenty of parking for all those rental cars. Rooms have desks and data ports for laptops. Lobbies are modest, but travelers wake to a breakfast buffet.

With an $89 average room rate last year, Courtyards go easy on corporate budgets. And because of their uniformity, they're easy to spot. Says CEO Marriott, 67: "We want people driving up the highway going: `Oh, that's a Courtyard. I saw one in Nashville, and I know what to expect when I get there."' The formula works: While industrywide revenue-per-available-room was up a mere 4% in 1998, Courtyard beat that by 2 points. It did the same in '97, posting 8% room-revenue growth. Today, Courtyard makes up 18% of Marriott's overall rooms.

But the suburban market is getting crowded. Hilton launched its Garden Inn chain three years ago to compete directly with Courtyard. It's expected to have 200 units open or under construction by next year. For now, Hilton is sticking with newly built properties, says Senior Vice-President Jim Abrahamson: "We think urban is a growth vehicle, but you need to stay focused on your prototype." Other rivals are moving downtown with their own rehabs. Just across from the New Orleans Courtyard sits an Embassy Suites, converted from a sugar warehouse by Felcor Lodging Trust Inc.

To keep a step ahead, Marriott plans to add about 20% more Courtyards in cities over the next five years. The converted buildings are on track with projected bookings, the company says. It hopes to expand the concept to other brands, by building extended-stay Renaissance Hotels & Resorts in city apartment buildings, for instance.

Short term, some customers may be turned off. "We do have some guests that are not fully satisfied," concedes Craig E. Lambert, Courtyard's senior vice-president for brand management. "People go in and say: `Where's my parking?"' Washington's Courtyard and others offer only valet parking. Charlie Adams, a Chapel Hill (N.C.) athletic director in town for a meeting of the National Federation of State High Schools, says he'd steer clear of F Street: "Of all the places we go all over the country, this is the worst downtown I've seen."

Making urban sites pay off is tough work. Rebuilding downtown hotels costs 20% to 30% more than building traditional Courtyards. And renovations can be complicated. Ancient plumbing and electrical systems often are more expensive to rebuild than to build from scratch. And older buildings' layouts pose challenges. Washington General Manager Michael James was stumped when workers told him they couldn't fit two king-size beds into room 701, even though they had just done so in room 801. Turns out the building's walls were inches thicker at the base, making the lower-floor rooms smaller. And its "pool" is little more than a big bathtub in the cellar. Says James: "Believe me, we did not want to dig a hole in the ground and build that pool, but it's a Courtyard standard to have a pool."

Getting an early jump on redevelopment requires other adjustments. Washington's city leaders have targeted F Street for a facelift, but meanwhile, hotel managers have hired extra security and will steer customers away from the rough side of the block. "We will have to educate guests that this is a tough town, not to walk that way after 11 o'clock at night," says James. Brand manager Lambert says Marriott had little choice but to move fast: "The neighborhood may affect our performance in early years, but if we were to wait until F Street was done, we couldn't afford it." As Marriott goes downtown, it's finding the rooms come with an entirely different view.By Lorraine Woellert in WashingtonReturn to top